Are your dividends legal?

byCarole Jordan

•

10 Jul, 2017

•

Without
the right declaration process you could find yourself with a higher tax bill,
rather than the tax saving you had hoped for from dividends. Follow our tips below to be sure you get
those tax savings.

The Dividend trap

Dividends are a distribution from after tax profit and can
be paid to shareholders based on their shareholdings. They are often a more tax efficient way of
taking money from your company. BUT it
is absolutely essential that you have made enough profit to avoid extra company
tax, income tax and national insurance.
Money in the bank doesn’t always equate to the amount you can take as
dividend. You should also be aware that dividend
tax rates have been increased, and they are set to increase further in 2018/19
.

When can you take a Dividend?

You must know your available distributable profits. If you don’t have final accounts prepared you
will need to estimate your post tax profits.
This means using your bookkeeping records or management accounts and
estimating the tax due on those profits.
Only then do you know for sure that you can take a dividend.

How do you protect yourself from extra tax?

Only take dividends within your distributable profit figure and
you will avoid tax which is due on any overpaid amount. The over payment is treated, for legal
purposes, as a loan from the company and if this loan is not repaid within 9
months of the end of the company’s financial year additional corporation tax is
due.

You will also avoid paying any additional income tax and
national insurance on the balance of the loan, because it is an interest free
loan, and therefore an employee benefit.

To protect yourself from HMRC demands to treat your dividend
as a salary, do the paperwork! A board minute declaring a dividend will state
that the directors intended the payment/s to be a distribution of profit and
not a salary.

What should you do if you take too much Dividend?

Firstly, don’t panic! Put the disciplines in place that we
have mentioned above and look to recover the situation.

If you cannot repay the overpayment immediately, you have 9
months to do so before the extra company tax is due.

Work with your accountant to monitor the situation so you
are aware of your tax liabilities and don’t breach any more rules, such as the
submission of a P11D declaring the interest free loan taken.

And, don’t think loans from your company are necessarily a
bad thing. They can be useful if used correctly, but there are rules around
this that need to be attended to.

Our
services
are broad and bespoke to you, if you need help declaring dividends
or finalising your Accounts then get in touch. We’re happy to discuss the needs
of your Limited Company and find a package that works for you and your budget.

All details above were correct at the time of
publishing - for more up to date information pleaseget in touch.

I love the summer for sitting back and reflecting on the
year. Thinking back to the dark days of
winter and forward to the joy of Christmas time. Now is the ideal time to review how your
business is going and as you revive yourself through holidays and sunshine
you’ll be well placed to make any changes come the autumn.